Penalty flags

Paying taxes is hard enough: Don't pay unnecessary fees

SAN FRANCISCO (CBS.MW) -- Paying one's taxes is perhaps the most onerous task required of American citizens. It's nice to think that when you're done, you're done for an entire year.

But for taxpayers who make mistakes on their return, can't file or pay on time, or purposely try to slip one by the IRS, it's all too likely that tax time will stretch on for months, replete with unnerving letters and hefty penalties.

To be fair, the IRS is not all that hard on honest taxpayers. Accidental math errors or incorrect Social Security numbers don't carry specific penalties, though the IRS may hit any unpaid tax that results from the mistake with interest and the failure-to-pay penalty.

You can request a waiver of the penalty (don't bother asking the IRS to forgive the interest, experts said), but there are no guarantees the IRS will agree with you.

"It used to be pretty common that they would waive penalties, but you need a good reason now," such as a medical emergency or particular circumstances that might have led to the error, said Steve Thorne, a partner in the tax practice at Deloitte.

Even without a stellar reason, it doesn't hurt to ask. "Write to them (and) say 'I agree I owe you the tax, but it was an unintentional mistake due to good cause. Would you please waive the penalties?" said Michael Eisenberg, a certified public accountant and personal financial specialist based in Los Angeles.

But "sometimes the penalties and interest are so small, it's better to just pay the thing and forget it," Eisenberg said. "You don't want to have a lot of correspondence with these guys. Lots of people feel queasy about having to deal with the Service."

File failures

Those who fail to file their return get dunned with a 5 percent per month penalty (up to a maximum 25 percent) on any unpaid tax. If you think you can't meet the April 15 deadline, consider filing an extension.

Those who fail to pay, or to pay enough, are assessed a 0.5 percent per month penalty (also a 25 percent maximum) on the unpaid balance. And there will be interest to pay, currently 5 percent, compounded daily.

Taxpayers awaiting refunds aren't assessed penalties for late payment. "Your tax is considered paid by the 15th, because to get a refund all your tax has to have been paid," said Cindy Hockenberry, information coordinator at the National Association of Tax Professionals.

But the IRS won't hand over your cash until any problems with your return are rectified.

Given the likelihood of penalties or a delayed refund, taxpayers rushing through the filing process at this late stage should keep their eyes peeled for common errors that often lead to unwanted IRS attention:

Parental oversight

The child tax credit is proving particularly difficult this year. Through March 10, the IRS had fixed more than 1.3 million returns filed with child-tax credit mistakes.

Of those, 900,000 failed to deduct the advance payment received last year and another 450,000 calculated the credit incorrectly.

Phase-out pitfalls

For instance, the amount of itemized deductions you're allowed to take starts to phase out for those with an adjusted gross income of $139,500 ($69,750 for married filing separately).

And personal exemptions -- right now they reduce taxable income by $3,050 per person -- start to phase out when income hits $209,250 for joint returns, $174,400 for heads of household, $139,500 for single filers, and $104,625 for married filing separately.

To make things even more complex, these phase-outs, like all tax law, are subject to Congressional whims. For instance, the phase-out on itemized deductions is itself being phased out starting in 2006, to disappear entirely in 2010.

Frivolity will be fined

For taxpayers unwittingly involved in a tax scam, such as a claim for reparations for slavery, realize that you have a chance to make amends.

The IRS generally allows filers to rescind erroneous claims without penalty, and the agency will tell you if your claim qualifies as frivolous. But taxpayers who don't agree to rescind these claims face a $500 penalty.

Common mistakes

The National Association of Tax Professionals offers the following list of 10 mistakes to avoid:

Math errors. Arithmetic or transferring numbers incorrectly is the most common error taxpayers make on their returns.

Forgetting to report some interest and/or dividends.

Incorrect tracking of investment basis. Also, this step is often calculated incorrectly resulting in double taxation on dividends or capital gains that were reinvested into stock.

Using the wrong tax tables or tax table amount.

Forgetting to include all of the necessary forms.

Omitting all social security numbers or submitting incorrect numbers.

Forgetting to include the proper signatures in all of the proper places.

Making the check out incorrectly or forgetting to sign it. (Checks need to be payable to the United States Treasury, not to the IRS.)

Not using the preprinted label or the envelope provided with the return.

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